Effect of US Financial Crisis on the Pacific Basin Equity Markets

This study examines the dynamic interrelationship among the major Pacific Basin equity markets (Hongkong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand) and the US equity market before and after the global financial crisis of 2007. To investigate the impact of the 2007 US financial crisis on these markets we split the sample into two sub-periods: pre-crisis (2005-2007) and post-crisis (2007-2009). Previous researches emphasize on the hypothesis that US is the main global dominating force, but our findings conclude that during this recent financial crisis, US was not the dominating force in the pacific basin equity markets. Our empirical tests show an increase in the level of integration between these markets after the crisis and provide evidence that these markets have become more integrated after the crisis. The main finding of the research was the dominant impact of South Korea on these Pacific Basin equity markets after the crisis and the significant bi-directional relationship between the US and South Korea. South Korea has taken the dominating role among the Pacific Basin countries in transmitting the US crisis effects rather than US directly affecting these equity markets. This leads to further research highlighting the role of South Korea among these Pacific Basin countries during a crisis, integration of South Korea with the other Pacific Basin equity markets and the relationship between U.S and South Korea not only in terms of the equity market but also among other macroeconomic variables which can influence the overall economic growth